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Higher order risk preferences and economic decisions

Author

Listed:
  • Yilong Xu
  • Maarten Boksem
  • Charles N. Noussair
  • Stefan T. Trautmann
  • Gijs van de Kuilen
  • Alan Sanfey

Abstract

In theory, individuals\' higher order risk attitudes of prudence and temperance influence saving and investment decisions. Prudent individuals save more when their future income becomes more uncertain, and temperate individuals prefer less risky investments in the presence of greater background risks. In a controlled experiment, we measure individuals' higher order risk attitudes directly, using two different elicitation methods. Participants then make saving and investment decisions under varying levels of background risk. We find strong effects of background risk on saving and investment. Moreover, individual prudence measures correlate with the strength of precautionary saving, while individual temperance measures do not do so with investment. The risk attitudes acquired with the two elicitation methods are strongly correlated with each other. The representative individual is risk averse and prudent, and neutral towards temperance.

Suggested Citation

  • Yilong Xu & Maarten Boksem & Charles N. Noussair & Stefan T. Trautmann & Gijs van de Kuilen & Alan Sanfey, 2025. "Higher order risk preferences and economic decisions," Experimental Economics Center Working Paper Series 2025-04, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
    • Handle: RePEc:exc:wpaper:2025-04
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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